AUTO-OWNERS INSURANCE COMPANY v. RANDALL SMITH MOBILE HOMES CORPORATION AND GREENPOINT CREDIT, LLC
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RENDERED:
NOVEMBER 5, 2004; 2:00 p.m.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2003-CA-001875-MR
AUTO-OWNERS INSURANCE COMPANY
APPELLANT
v.
APPEAL FROM LAUREL CIRCUIT COURT
HONORABLE LEWIS B. HOPPER, JUDGE
ACTION NO. 03-CI-00198
RANDALL SMITH MOBILE HOMES
CORPORATION AND GREENPOINT
CREDIT, LLC
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
COMBS, CHIEF JUDGE; GUIDUGLI AND KNOPF, JUDGES.
COMBS, CHIEF JUDGE:
Auto-Owners Insurance Company appeals from
a summary judgment of the Laurel Circuit Court requiring the
insurer to defend and to indemnify its insured.
After our
review of the facts of this case and the pertinent law, we find
no error.
Thus, we affirm.
The appellant, Auto-Owners, is a Michigan insurance
company licensed and authorized to do business in the
Commonwealth of Kentucky.
From June 17, 1999, until June 17,
2000, it provided a commercial liability insurance policy to
Randall Smith Mobile Homes Corporation (Smith Mobile Homes or
Smith), a retail merchant of manufactured homes doing business
in southeast Kentucky.
Since most of these sales were financed transactions,
the company also maintained a close business relationship with
Greenpoint Credit, LLC, a consumer finance company.
Greenpoint’s predecessor in interest (Security Pacific Financial
Services) had signed a formal agreement in 1993 in which it
agreed to purchase installment sale contracts for consumer
mobile homes from Smith Mobile Homes.
In exchange, Smith Mobile
Homes agreed to provide repossession services for Greenpoint
upon the default of a mobile home purchaser in the performance
of the installment sale contract.
Representatives of Smith Mobile Homes undertook such a
repossession on April 1, 2000, on behalf of Greenpoint.
They
encountered problems in removing the mobile home from its
location that required extra assistance from an independent
contractor.
Because the unexpected delays meant that the
repossessed mobile home could not be transported to Smith’s
property before nightfall, it was parked overnight at an
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intermediate location.
During the night, the mobile home
burned, resulting in a total loss.
Smith promptly notified
Auto-Owners of a potential claim.
On May 29, 2001, Greenpoint filed an action against
Smith Mobile Homes in Clay Circuit Court seeking to recover
approximately $44,400.00 for the loss of its collateral.
Upon
being served with a copy of the summons and complaint, Smith
Mobile Homes forwarded the documents to Auto-Owners along with a
request that Auto-Owners acknowledge its duty to defend its
insured in the action.
When Auto-Owners failed to respond to the
correspondence or to answer Greenpoint’s complaint by June 20,
2001, Smith Mobile Homes asked its general counsel, Brown &
Hill, PLLC, to file an answer on the company’s behalf.
At about
the same time, without Smith’s knowledge, Auto-Owners undertook
the defense of the action by engaging Kenneth Gilliam as defense
counsel.
Gilliam also filed an answer.
Thus, by June 29, 2001, Greenpoint’s counsel, Glenn E.
Algie, had received two separate and independent answers to his
complaint.
In a single letter forwarded both to Brown & Hill
and to Gilliam, Algie expressed his understandable confusion.
Asking to be advised as to which of the attorneys would
represent Smith, he enclosed comprehensive written discovery
requests -- including numerous requests for admissions.
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Robert L. Brown III of Brown & Hill consulted with
Auto-Owners and Gilliam directly and then sent a letter to
Gilliam on July 12, 2001.
In this correspondence, he described
the role of Brown & Hill as general counsel to Smith Mobile
Homes and explained that it had made an appearance in the Clay
Circuit Court action only to prevent entry of a default judgment
against the company.
Brown & Hill acknowledged that it would
not continue to serve as counsel to Smith in this matter and
requested that Gilliam advise the Clay Circuit Court
accordingly.
Brown & Hill confirmed that Smith Mobile Homes was
relying solely and unconditionally upon the representation
provided by Auto-Owners through Gilliam.
Finally, Brown & Hill
provided a synopsis of the facts surrounding the loss as related
by Smith personnel.
Brown & Hill requested that Gilliam keep it
“posted as to the status of the case” by copying it on pleadings
and reports.
However, Gilliam never forwarded any reports or
pleadings in the case to Brown & Hill.
Some six months later, in January 2002, Brown & Hill
received another letter from Algie, counsel for Greenpoint.
Algie’s letter explained that since he had received no response
to his discovery requests of June 29, 2001, he was forwarding
his motion for summary judgment on behalf of the plaintiff to
both attorneys who had appeared for Smith Mobile Homes.
The
basis of the motion was Gilliam’s failure to make a timely
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response to Greenpoint’s motion, including the requests for
admissions that were now to be deemed admitted for failure to
file timely answers or objections.
CR1 36.01(2).
Upon receipt of Algie’s correspondence and the summary
judgment motion, Brown & Hill contacted Gilliam, who once again
confirmed that he was providing the defense for Smith Mobile
Homes.
Although he admitted that the discovery requests had not
been timely answered, he assured Brown & Hill that he would
handle the matter at the hearing on the motion for summary
judgment.
In correspondence dated March 5, 2002, Brown & Hill
outlined this history directly to Auto-Owners.
Brown & Hill
identified itself as general counsel to Smith Mobile Homes and
emphasized that the correspondence sought to confirm that Smith
was indeed being represented by counsel hired by Auto-Owners,
reminding Auto-Owners “that the duty to defend this matter”
rests entirely with the carrier.
Brown and Hill advised as
follows:
In the event the Plaintiff’s [summary
judgment] motion is granted, [Smith Mobile
Homes] will expect to be completely
indemnified from liability in this matter. .
. .
If this is not correct, I will expect to be
notified immediately, so I can take steps to
1
Kentucky Rules of Civil Procedure.
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protect [Smith Mobile Homes’s] best
interests.
Both Gilliam and Auto-Owners directly confirmed that Smith
Mobile Homes could continue to expect to be defended by the
carrier.
On March 14, 2002, attorney Algie advised Brown & Hill
and Gilliam that he intended to file a motion to compel on
behalf of Greenpoint, seeking responses to discovery and
recovery of attorney’s fees from Smith Mobile Homes.
Brown &
Hill again promptly corresponded with Auto-Owners.
The firm reiterated that it was acting only as the
insured’s general counsel and that it had no intention of
defending Smith in the lawsuit brought by Greenpoint.
Brown &
Hill once more requested confirmation that Gilliam was defending
and would continue to defend the action.
As general counsel,
Brown & Hill again requested that Auto-Owners report to it as
general counsel to keep it apprised of developments in the case.
Correspondence from the field claims representative for AutoOwners confirmed in response that in no uncertain terms the
carrier was defending Smith Mobile Homes in the litigation
against it.
On December 31, 2002, some eighteen months after AutoOwners had undertaken the defense of the action, its field
claims representative notified Smith that exclusions included in
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the liability policy meant that the outstanding claim was not
covered after all.
This notice was addressed to Smith Mobile
Homes directly –- not to Brown & Hill.
Auto-Owners then offered
to continue to provide a defense against Greenpoint’s claim
“because we did not advise you of the coverage issue sooner . .
. .”
However, it stated that “there will be no coverage for
this loss if a judgment is granted against you.”
In closing,
Auto-Owners announced its intention to file a declaratory
judgment action against Smith Mobile Homes.
Accordingly, on February 28, 2003, Auto-Owners
instituted this declaratory judgment action in Laurel Circuit
Court against Smith Mobile Homes, its insured, and Greenpoint.
In its complaint, Auto-Owners contended that the terms of its
insurance policy excluded from coverage property damage to any
personal property in the care, custody, or control of the
insured.
Consequently, Auto-Owners claimed that it was not
liable for the loss of the mobile home.
Auto-Owners also
alleged that it had undertaken the defense of Smith Mobile Homes
under a reservation of rights.
Auto-Owners sought a declaration
that it was under no obligation either to defend or to indemnify
Smith Mobile Homes in connection with the loss of Greenpoint’s
collateral.
Auto-Owners also sought its costs and attorney’s
fees.
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In its answer, Smith Mobile Homes denied that its
insurer had ever defended the action under a reservation of
rights.
Smith contended that Auto-Owners had waived the defense
of denying coverage; in the alternative, it argued that AutoOwners should be estopped from asserting such a defense.
On April 23, 2003, Auto-Owners filed a motion for
summary judgment, asserting that there was no coverage under the
insurance policy for the claim brought by Greenpoint against its
insured.
It sought a judgment declaring that Auto-Owners had no
obligation to defend or to indemnify Smith Mobile Homes with
respect to the proceedings in Clay Circuit Court.
On May 9,
2003, Smith responded to the motion, requesting that the trial
court order Auto-Owners both to provide coverage and to continue
its defense of its insured since it had undertaken the defense
without a reservation of rights and had thereby prejudiced
Smith’s ability to defend itself.
On June 13, 2003, in an order denying Auto-Owners’
motion for summary judgment, the trial court nonetheless entered
summary judgment in favor of Smith Mobile Homes.
Concluding
that there were no genuine issues of material fact, the court
held that Smith Mobile Homes was entitled to judgment as a
matter of law since Auto-Owners was estopped by its conduct from
denying liability under the insurance policy.
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Auto-Owners’
motion to alter, amend, or vacate was denied, and this appeal
followed.
The issue on appeal is whether the trial court
correctly concluded that Auto-Owners is precluded from asserting
that the loss was not covered by its policy since it had
represented that it was defending the action against Smith
Mobile Homes without first securing a reservation of rights.
As
the question presented to the trial court was a matter of law,
our review is de novo.
S.W.3d 376 (2000).
Stewart v. Commonwealth, Ky. App., 44
After examining the record and the insurer’s
conduct over the course of these proceedings, we agree that the
trial court was correct in holding that Auto-Owners is precluded
from disclaiming coverage.
The rule applicable in this case is widely accepted
and has long been the law in our Commonwealth.
Generally, an
insurer’s unconditional defense of an action brought against its
insured constitutes a waiver of the policy provisions and an
estoppel as to the insurer to disclaim liability.
Insurance §1413 (2003).
44 Am.Jur.2d
Whenever waiver or estoppel is found,
an insurer is barred from asserting what otherwise might be a
legitimate exclusion of coverage under its policy.
Id.
In American Casualty Co. of Reading, Pa. v. Shely, 314
Ky. 80, 234 S.W.2d 303 (1950), Kentucky’s highest Court squarely
addressed the legal effect of American Casualty’s decision to
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defend its insured for nearly a year without a reservation of
rights.
Consulting numerous sources, the court cited directly
from 45 C.J.S., Insurance, §714, page 684:
Broadly speaking an insurance company which
undertakes or continues the defense of an
action against insured with knowledge or
means of knowledge of grounds for avoiding
its liability to insured, and without due
notice to insured of its disclaimer of
liability, will on principles of waiver and
estoppel be precluded from thereafter
avoiding liability under the policy . . . .
American Casualty, supra at 305.
The Court observed that a
basic element of an estoppel is “that the person claiming it
must have been prejudiced by the action of the person against
whom it is asserted.”
Id.
More recent cases have reiterated
the fifty-four-year-old holding of American Casualty – - with
none departing from its reasoning.
See also Hood v. Coldway
Carriers Inc., Ky. App., 405 S.W.2d 672 (1965); Universal
Underwriters Ins. Co. v. The Travelers Ins. Co., Ky. App., 451
S.W.2d 616 (1970); The Western Casualty & Surety Co. v.
Frankfort, Ky. App., 516 S.W.2d 859 (1974).
The American
Casualty Court continued in language most significant to the
case before us to hold that “where an insurance company
undertakes the defense of an accident case, the loss of the
right by the insured to control and manage the case is itself
prejudice.”
Id.
(Emphasis added).
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Auto-Owners attempts to circumvent this rule by
arguing that Smith failed to show that it had detrimentally
relied upon Auto-Owners or that it had been prejudiced by its
insurer’s handling of the defense.
Auto-Owners denies that its
insured was harmed in any manner by its actions and contends
that Smith Mobile Homes would be unable to produce affirmative
evidence of actual prejudice.
It claims that its withdrawal at
this juncture has not deprived Smith of an adequate opportunity
to defend against the action.
We heartily disagree.
The appellant’s argument fails to account for the
critical importance of the eighteen-month period during which it
had exclusive and total control over the defense of the
underlying action.
This time-frame encompassed a series of
issues and events crucial to a proper defense of the lawsuit.
By its reliance on Auto-Owners’ purported defense, Smith Mobile
Homes suffered a series of detrimental results that prejudiced
its position.
Among these losses were the opportunities:
to
conduct a proper investigation of the facts surrounding the
loss; to participate in meaningful settlement negotiations; to
engage in good-faith cooperation for discovery; and otherwise to
manage the litigation on its own behalf and in its best
interests.
By the very terms of the policy that it now seeks to
avoid, Auto-Owners alone was entrusted and entitled to
investigate, to defend, and to settle any claim in an action
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seeking damages against its insured.
Having been required by
the terms of the policy to turn over its defense to Auto-Owners,
Smith Mobile Homes retained the sole recourse of having its
general counsel monitor the course of the proceedings against
it.
Many months before it attempted to claim a reservation
of rights, Auto-Owners was made aware of the facts and
circumstances as to which it now seeks to avoid liability.
Nevertheless, and despite an obvious potential for an ethical
conflict of interest, the company repeatedly misrepresented to
Smith Mobile Homes that Auto-Owners was defending the action and
that it would continue to do so.
Smith unequivocally and
repeatedly notified Auto-Owners that it was relying on these
representations that extended over the considerable period of
eighteen months.
Undoubtedly Smith so relied to its clear and
undeniable detriment.
The resulting prejudice to Smith Mobile
Homes is manifest.
Auto-Owners could have easily avoided any prejudice by
explicitly reserving its right to contest coverage within a
reasonable time after it had assumed the defense of its insured.
However, it elected not to do so.
Its election had critical
consequences both for itself and its insured.
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We hold that
Auto-Owners’ entire pattern of conduct constitutes a legally
sufficient showing of prejudice in this case to warrant summary
judgment in favor or Smith.
Auto-Owners has also raised the procedural point that
Smith Mobile Homes never requested that summary judgment be
entered in its favor.
The trial court not only rejected the
motion for summary judgment filed by Auto-Owners but instead
used its motion as a vehicle to grant summary judgment to its
adversaries, who had not filed cross-motions seeking such
relief.
Auto-Owners argues that the trial court erred by
granting summary judgment when legal issues had not been
properly submitted for determination.
We disagree.
In responding to Auto-Owners’ motion for summary
judgment, Smith Mobile Homes asked that the trial court order
Auto-Owners both to provide coverage and to continue to defend
since it had undertaken the defense without a reservation of
rights to the prejudice of Smith’s ability to defend against the
action.
This response did not constitute a cross-motion or
request for summary judgment.
Nonetheless, trial courts are
empowered to grant such relief under particular circumstances.
If all of the pertinent legal issues are before the
court at the time the matter is submitted, and if resolution of
the motion filed by the movant necessarily requires a
determination that the non-movant is entitled to relief, the
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movant cannot be heard to complain if summary judgment is
granted against him rather than for him as he had contemplated.
Storer Communications v. Oldham Co., Ky. App., 850 S.W.2d 340
(1993).
In this case, in considering the motion of Auto-Owners
claiming that it had no obligation to defend or to indemnify
Smith under the policy, the court was necessarily required to
resolve the waiver and estoppel arguments of Smith Mobile Homes.
Smith sufficiently demonstrated that Auto-Owners embarked upon
an unalterable course of conduct and misrepresentation that
prejudiced Smith’s ability to control the defense of the
underlying action.
All pertinent issues were before the court.
Upon
determining that the insurer was precluded from denying
coverage, the court correctly concluded that Smith Mobile Homes
–- albeit the non-movant –- was undeniably entitled to relief.
Auto-Owners suffered no legitimate prejudice.
The trial court
did not err by granting Smith’s request for relief that
translated into a judgment in its favor under these unusual
circumstances.
We affirm the judgment of the Laurel Circuit Court.
ALL CONCUR.
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BRIEFS FOR APPELLANT:
Thomas L. Travis
Luke A. Wingfield
Lexington, Kentucky
BRIEF FOR APPELLEE RANDALL
SMITH MOBILE HOMES
CORPORATION:
Ralph W. Hoskins
Corbin, Kentucky
ORAL ARGUMENT FOR APPELLANT:
Thomas L. Travis
Lexington, Kentucky
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